Tornado Alley (PROG)

[n4807g]

Hi wall...this is and has been the standard line of rhetoric for this decade. Do you recall the incessant political speak of the 80's and 90's, that we were becoming a "service based economy"? That was true, we did become a service based economy and that trend has been accelerating ever since. I've been in manufacturing since the 70's and I have watched the incentives and real returns on manufacturing facilities in the USA virtually disappear. Most politicians and the American populace are entirely in the dark when it comes to understanding the unique problems that face manufacturing. I'm not suggesting that the decline in manufacturing is good, because it isn't, but it is inevitable. When I started my company in Massachusetts many of my fellow college graduates were headed for the mini-computer industry. Prime, Digital, Wang, Data General...the whole gang were hiring everyone they could get their hands on. A very good friend worked at Digital and about 2 months after he started we had a conversation about our new working lives. He made two comments that I'll never forget, the first was that DEC wouldn't even look at a hardware product if it didn't have a gross margin of over 1200%, and the second was that they were making so much money on the sale of hardware that they hired people based on projected need 12 months in the future. He said that in the facility he worked about 1 out of every 3 people wouldn't have to come to work before anyone would notice. Organic growth was insane.

Imagine 1200% profit.....and there is where the problem lies. Manufacturing gross margins have been dropping for decades for US based manufacturers. It's easy to see the problem and assign blame for political gain, but the solution is far more complicated and doesn't have a solution that can be legislated. For manufacturers based in the USA it's equivalent to death by 1000 cuts. If I didn't already have the investment in a building and equipment it wouldn't make sense for me to start this business in 2009, that's the sad truth. The only manufacturers who can compete going forward are the high margin producers in certain hi-tech and pharmaceuticals. The majority of remaining manufacturers will eventually fade away or move overseas.

One final point, the focus on manufacturing is interesting from this perspective; it's a very small segment of the economy. In the 1940's, 50's, and 60's it was more than 50% of our economy, today it's less than 15%. In fact the government sector is a larger part of the economy and health care is the 800lb. gorilla. Here's a great article on the subject

http://www.allbusiness.com/manufacturing/computer-electronic-product-manufacturing/225455-1.html

take note of the date....pre auto industry failure